Apple - One more thing Tim Cook knows ?

Apple - One more thing Tim Cook knows ?

by Pininvest Analysis

Apple providers on

  • constituents
  • 35.6% 1y performance
  • 37.0% volatility
Check the investment theme exit_to_app

Sales falling back in China, no take-off in India, bad vibes about Europe and weakness in the US may just be a blip on Apple’s great track record
The resilience of the Asia-based supply chain is the crux of the matter for Apple as a value  stock




To follow-up on our comments on Apple's supply chain 

Lest we forget…

Mr. Cook owes his current job as CEO of Apple to his supply-chain expertise, honed at IBM and, briefly, at Compaq, in the employ of Steve Jobs, upon the founder’s return in 1998

The intricate network of contract manufacturers Mr. Cook put in place became one of the key strengths of Apple – covering today hundreds of suppliers and key sites around the world

Apple benefitted vastly from the industrial strategy, reducing inventory drastically to mere days

It will be noted however that for the 3 months to September ’18, the 11.96 days of inventory tops the 10-year range of the company, from a minimum of 3.26 days


  • sharply negotiated volume orders from a wide range of suppliers
  • with tiered deliveries and obligation to store – and insure – the goods in ‘hubs’ until Apple sees fit to withdraw the goods as needed…)
  • with exclusivity requirements over a set period in some cases

the Apple ‘eco-system’ may be hitting the buffers, as Apple keeps up the pressure to preserve its margins in the face of slowing sales growth

Estimates published by the Economist on September 8, 2018 paint a picture of a wobbly, may be even sickly supply chain

Based on data from the 42 top suppliers, provided by Bloomberg, IHS Markit and Morgan Stanley, the Economist figures that

  • the 42 firms cover about 75% of the supply chain’s gross profit
  • Apple itself and 13 chip suppliers hog 90% of total profits of the ‘pool’
  • the remaining 29 firms, including assemblers (such as Hon Hai) and niche component makers, carrying the most fixed assets and employees, have a net profit margin estimated at only 2%

Though cautioning that the typical supplier to the smartphone industry is ‘secretive’, what the analysis implies is that

  • with thin margins – the small specialized manufacturers will survive only with successful diversification – and remain dangerously exposed to market downturns, related to trade tensions or demand volatility
  • with large working capital requirements, and weak profitability, assemblers have probably more of an edge in negotiating terms with Apple, for lack of expert alternatives

Neither outcome fits well in the long-term vision of Apple


From the perspective of Mr. Cook

With so much attention paid to the company’s marketing wherewithal and technological achievements, the critical role of the material organization may have been taken for granted by the investors, lulled into complacency by a carefully attended net profit margin (22.4%) and a growing return on shareholder equity (49.4%)

This tranquil view is – in our view – not shared by Apple’s management, more likely to be on the brink ….

As fate will have it, the company is challenged simultaneously on 3 fronts

  • smartphone markets tend to mature, worldwide (including in China) and recent revenue data is indicative of customer weariness and blasé response to yet another upgrade
  • logistics of the supply chain have relied in a large measure on abundant and cheap labor in China
  • with trade tension between the US and China unlikely to ease, the entire supplier network of semi-conductor industry must be reconsidered

Regarding the impact of slowing sales of Apple products, suppliers have been taking the brunt …up to now

  • to protect the supply chain, some flexibility is likely, impacting the cost of goods sold in the near future
  • however, the company has signaled a strategic shift towards services, which include Digital Content and Services, Apple Pay, AppleCare and licensing (iTunes, the App Store, Apple Music and iCloud), representing 16% of total revenue year-to-date ($ 10 billion in the quarter ending Sept.30, 2018)
  • we assume management expects profitable services to rebalance margin erosion on hardware over time

Because the Apple supply chain is integral part of the large semi-conductor and assembly eco-system spanning China and South-East Asia, the company has uniquely benefitted from its advantages, and is today exposed to the risk of its unraveling

  • Chinese salaries have been on a continuous upward trend in the key ‘Pearl River Delta’ areas, at approx. 6% per year, with only a slight softening anticipated in 2019. The deep integration across industries in the region has mitigated creeping salary growth and kept alternative production sites in South-East Asia –  Vietnam, Cambodia or the Philippines – at bay… but for how long ?
German Chamber of Commerce 2018-2019 (page 22)
  • Further complexity can be found in the intense specialization of which the considerable trade deficit of China with Taiwan and Korea, standard bearers of the electronics supply chain, is the most notable proof
Source CFR - B.Setser blog 
  • But the suppliers network spanning the region could be turned into an advantage by Apple in an effort to diversify away from China


Although the uncertainties hanging over global trade remain a great unknown, we have argued for a slow, but inescapable economic uncoupling between the US and China as existing trade links fall into disfavor, a development Apple appears to have anticipated

  • With far flung sourcing turning into a potential weakness, however tightly the supply chain is controlled, Apple has been bringing technological know-how in-house over the years, paving the way for further integration of the production
  • In final assembly, China continues to dominate with Fox Conn employing more than a million people without obvious alternatives. But the announcement of an LCD-manufacturing facility by Fox Conn expected to employ 13 000 people within 6 years might a test for deeper transformations, with advanced robotics in domestic production units


Closing our argument with an old Soviet (!) joke,

"the future is certain, it is the past that is unpredictable"

this is because the past (including  the analysis in our review) is subject to interpretation while the future...well...has to be...